SEC Rocked By Lurid Sex-and-Corruption Lawsuit
POSTED: November 19, 3:10 PM ET
Matt Taibbi
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Move over, adulterous generals. It might be time to make way for a new sexual rats'nest – at America's top financial police agency, the SEC.

In a salacious 77-page complaint that reads like Penthouse Forum meets The Insider meets the Keystone Kops, one David Weber, the former chief investigator for the SEC Inspector General's office, accuses the SEC of retaliating against Weber for coming forward as a whistleblower. According to this lawsuit, Weber was made a target of intramural intrigues at the agency (which has a history of such retaliation) after he came forward with concerns that his bosses may have been spending more time copulating than they were investigating the SEC.

Weber vs. the SEC: The Full Complaint

Weber claims that in recent years, while the SEC Inspector General's office has been attempting to investigate the agency's seemingly-negligent responses in such matters as the Bernie Madoff case and the less-well-known (but nearly as disturbing) Stanford Financial Ponzi scandal, two of the IG office's senior officials – former Inspector General David Kotz and his successor, Noelle Maloney – were sleeping together.

Weber also claims that Kotz was also having an affair with a lawyer representing a key group of Stanford victims, a Dr. Gaytri Kachroo. Where the story gets really strange is where Weber claims that Maloney last year refused to meet with Kachroo as part of the Stanford investigation. By then, Kotz had stepped down as SEC IG and Maloney had replaced him as Acting IG. The complaint describes Weber confronting Maloney over the issue, asking why she wouldn't meet with the lawyer representing a key group of Stanford victims.

Maloney asked Weber to close the door to her office. Maloney told Weber that she would deny the following conversation if Weber were to repeat it.

Maloney then said that, "David (Kotz) was fucking that lady . . ." Maloney stated that Kachroo had received special treatment. Maloney even questioned whether the OIG would have ever opened an investigation into the SEC's oversight over the Court-Appointed Receivership in SEC v. Stanford.

The Weber lawsuit is the latest chapter in an ongoing drama that began when Kotz stepped down last January amid not-world-shaking ethics questions (including, of all things, receiving Philadelphia Eagles tickets from a financial adviser). Subsequently, however, an investigation by the U.S. Postal Service Inspector General David Williams concluded more seriously that Kotz violated rules by overseeing investigations involving people with whom he had "personal relationships."

Weber's complaints, made early last year, were apparently the impetus for that Williams investigation. If what happened to Weber subsequently was retaliation, it didn't take long. Weber was placed on leave in May after being accused of being a "personal threat" who wanted to bring a gun into the office. The "gun" incident was highly publicized, and Weber was ridiculed in the media (sample from the Atlantic Wire: "Do You Really Need a Gun to Police the SEC?").

Weber was fired on October 31st. Apparently he has decided not to take the firing quietly. "When David Weber began to uncover the depth of dysfunction at the SEC, they fired him," his attorney Cary Hansel said. "He has no intention of being silenced by threats and false allegations."

The filing of this lawsuit now by Weber officially begins the raging clusterfuck portion of the story, as he and his lawyers are releasing lurid details not only about Kotz and Maloney, but about a host of other SEC and SEC IG officials. It's very strong stuff: the only things missing from this lawsuit are tales of SEC officials running white-slavery rings and snorting brown-brown off the corpses of strippers with West African rebels.

There are, for instance, allegations that officials handed out SEC contracts to buddies at influential Beltway consulting firms, claims that sexual harassment cases were covered up and accusations that the SEC failed to properly screen contractors who were given full access to SEC databases (it cites an example of one contractor who was on early parole from a 10-year narcotics bid in Virginia). The suit also alleges that the SEC security chief, William Fagan, "watched the video feed from security cameras outside of the [Inspector General's] suite, in order to determine the identities of . . . potential whistleblowers."

Perhaps most crazily, however, the suit alleges major security violations. In one section, Weber claims that SEC investigators took sensitive, highly-protected system data from financial exchanges like the NYSE – systems so carefully protected that they have to be "air gapped," i.e. not connected to the internet – and loaded them on unencrypted laptops before flying to Vegas to attend a "Black Hat" convention for security specialists and hackers. From the suit:

Many government and law enforcement officials who attend the "Black Hat" conference register under aliases, keeping their identities and employers secret. However, the SEC staff who attended, with unencrypted laptops containing sensitive exchange information, registered under their own names and identified their employer. Walking around this convention with a name tag and, regardless of name tag, registered as an SEC IT information security examiner, is the equivalent of wearing a giant target on one's back.

Reassuring!

It's hard to say how all of this will shake out. Certainly, from a P.R. standpoint, it'll be ugly for the SEC. One other storyline to follow: If the Weber retaliation claims are true, they fall within an ongoing and increasingly disturbing pattern of federal whistleblowers who have come forward and experienced reprisals themselves instead of having their claims investigated properly.

Another story to follow is the possibility that the SEC Inspector General's office in recent years was weakened or compromised by these sexual scandals in any way. If all this kink was common knowledge within the agency, it is not hard to imagine that OIG investigations into things like the Madoff mess might have had their momentum slowed by internal politics.

Anyway, crazy stuff, more to come down the line. SEC spokesman John Nester by the way had no comment on the story today, except to say: "We look forward to filing our response with the court."

SEC Sued by Fired Investigator Who Alleged Ethical Lapses
By Robert Schmidt and Tom Schoenberg - Nov 15, 2012 5:23 PM ET
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David Weber, a former U.S. Securities and Exchange Commission internal investigator fired for allegedly carrying a firearm while on duty, sued the agency for wrongful termination.

Weber, who was chief investigator in the SEC’s inspector general’s office, is asking for $40 million in damages. His suit, filed today in federal court in Washington, argues that he was terminated as part of a campaign to “cover up” and “whitewash” disclosures of wrongdoing he was investigating.

“When David Weber began to uncover the depth of dysfunction at the SEC, they fired him,” said his attorney, Cary Hansel. “He has no intention of being silenced by threats and false allegations.”

Weber was placed on paid leave by the SEC in May, shortly after he raised allegations that ex-inspector general H. David Kotz may have had personal relationships that tainted probes on the SEC’s handling of the Bernard Madoff and R. Allen Stanford Ponzi schemes. Weber was fired on Oct. 31.

The lawsuit called the gun allegations “baseless” and said he kept a legally registered firearm in his car.
John Nester, an SEC spokesman, declined to comment on the allegations and said the agency would respond in court.

The 75-page lawsuit alleges that people involved in firing Weber had conflicts of interest because they were subjects of investigations being supervised by Weber. The court filing contains extensive detail on the probes that Weber was pursuing in his job.

Hacker Convention

In one instance, Weber was looking into the possibility that the SEC mishandled sensitive data it obtained from the major stock exchanges, the filing said. SEC laptops, Weber found, didn’t have virus protections, firewalls or encryption programs. They were also taken to foreign countries and a well- known hacker convention in Las Vegas, according to the lawsuit.

After Weber raised his concerns about the data to senior SEC management, including Chairman Mary Schapiro, he was barred from the agency and placed on leave, according to the lawsuit.

On that May morning, Weber was on the way to work when he was tipped off by a colleague that “many security armed officers had been posted around the office and were looking for him,” according to the lawsuit. Weber then picked up his private attorney and went to the agency where, according to the filing, he was surrounded and prevented from entering the building.

Schapiro is named as a defendant in the filing.

Kotz Resignation

Weber’s original complaints prompted the SEC to bring in David Williams, the inspector general of the U.S. Postal Service, to conduct a review. Williams concluded that Kotz violated ethics rules by overseeing probes that involved people with whom he has “personal relationships.” Kotz resigned in January amid questions about his tactics and conduct.

Williams also said in his report that he didn’t find any evidence that indicated Weber’s conduct was improper or raised security concerns.

The case is Weber v. U.S. Securities and Exchange Commission, 12-cv-01850, U.S. District Court, District of Columbia (Washington).

To contact the reporters on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net; Tom Schoenberg in Washington at tschoenberg@bloomberg.net
To contact the editors responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net; Andrew Dunn at adunn8@bloomberg.net
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